Professional Report

management contract for the planned renovation of the property with the JV; and the seller receives the benefit of each part of the plan i.e. value from refinancing, new debt, lower interest rate and cost, and better return on investment. Seller also derives benefit from “owner’s eyes” in management and construction management. If the property increases in value over the next few years, after Seller’s preferred return, the Buyer’s share of the profits on resale doubles from 5 percent to 10 percent. Arguably, its broker has brought value to the seller – but how much benefit, and when?

In this scenario, how would your own listing agreement protect you? Was the possibility of a JV overlooked (no deed, no closing, therefore no commission)? Is your fee based on the amount of “new money” meaning the reduced fee in our example? Was the fee a fixed amount or a minimum amount if the property is essentially taken off the market, i.e. as liquidated damages? Could this merit a full fee because the property was removed from the market? Might the fee be computed on the value added, meaning future value at time of resale?

You procured a buyer who invested
cash, brought management expertise,
As much as I worry about deferred
commissions, could an agreement be
made that the commission should be
based on the “ultimate” closing, the value
created from the JV the broker procured?

Consider the following language which a well prepared broker might use: “If Owner is a partnership, corporation, limited liability company, or other business entity (collectively “Ownership Entity”) and an interest is the Ownership Entity is transferred, whether by merger, outright sale, or through recapitalization of the Ownership Entity, in lieu of a sale of the Property, and applicable law does not prohibit the payment of a commission in connection with such sale or transfer, the commission shall be calculated on the fair market value of the Property rather than the gross sale price, multiplied by the percentage of interest so transferred and shall be paid at the time of the transfer.

Add the following: “In the event that Owner forms a joint venture, Owner shall pay Broker a commission on the value of the portion of the property or the entity which owns the property sold or contributed to the new venture; “and as a result of the new venture, if the Property is sold thereafter within ______ years, Owner shall pay broker a deferred commission computed as __ percent of the profit realized, computed as the difference between the gross sale price and the value of the joint venture initially stipulated.” This seems fair, Seller gets new management, new debt with better terms, buyer gets an extra “bonus” share of sale proceeds – and the broker who put it all together for the parties, gets some extra commission. Perhaps some inclusive language in the listing agreement could cause such a scenario.

You probably can’t predict how every deal would take shape, but you should try and cover your right to commission for value added. The challenge is computing that value and getting your client to recognize and reward your own contribution.

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